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A Model of Cryptocurrencies

Author

Listed:
  • Michael Sockin

    (University of Texas, Austin)

  • Wei Xiong

    (Princeton University)

Abstract

This paper develops a model to examine decentralization of online platforms through tokenization as an innovation to resolve the conflict between platforms and users. By delegating control to a collection of preprogrammed smart contracts, tokenization creates commitment devices that prevent a platform from abusing its users. This commitment comes at the cost of not having an owner with an equity stake who, in conventional platforms, would subsidize user participation to maximize the platform’s network effect. This trade-off makes utility tokens a more appealing funding scheme than equity for platforms with weak fundamentals. Our analysis further highlights that token prices are determined by the marginal user’s convenience yield, in contrast to equity, whose payoff is determined by the average user.

Suggested Citation

  • Michael Sockin & Wei Xiong, 2021. "A Model of Cryptocurrencies," Working Papers 2021-67, Princeton University. Economics Department..
    • Handle: RePEc:pri:econom:2021-67
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    File URL: https://wxiong.mycpanel.princeton.edu/papers/DynCrypto.pdf
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    References listed on IDEAS

    as
    1. Bruno Biais & Christophe Bisière & Matthieu Bouvard & Catherine Casamatta & Albert J. Menkveld, 2023. "Equilibrium Bitcoin Pricing," Journal of Finance, American Finance Association, vol. 78(2), pages 967-1014, April.
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    6. Cong, Lin William & Li, Ye & Wang, Neng, 2022. "Token-based platform finance," Journal of Financial Economics, Elsevier, vol. 144(3), pages 972-991.
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    Cited by:

    1. Cole, Benjamin M. & Dyhrberg, Anne H. & Foley, Sean & Svec, Jiri, 2022. "Can Bitcoin be Trusted? Quantifying the economic value of blockchain transactions," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 79(C).
    2. Ahmed, Walid M.A., 2022. "Robust drivers of Bitcoin price movements: An extreme bounds analysis," The North American Journal of Economics and Finance, Elsevier, vol. 62(C).

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    More about this item

    Keywords

    Cryptocurrencies;

    JEL classification:

    • G19 - Financial Economics - - General Financial Markets - - - Other

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